What Types of Life Insurance Have a Cash Value?

July 27, 2018

Life insurance protects your loved ones in the event of your death. It’s an important policy whether you are the breadwinner or a homemaker. It helps your loved ones stay financially stable in the wake of your passing. But wouldn’t it be nice if your policy had a cash value?

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A few policies have benefits beyond the death benefit provided to your loved ones. They are called permanent life policies, rather than term life insurance. You’ll find a few different types of policies that have a cash value. While each has different features, the one thing they have in common compared to term life insurance is the higher premiums charged.

How Insurance Gains Cash Value

The two most common types of permanent life insurance are whole and universal life. Both options have a cash value beyond the standard term life death benefit. Each type accumulates cash in various ways:

  • Whole Life – You receive a fixed rate of return on the portion of your premiums that are invested rather than put towards the term life insurance premium
  • Indexed Universal Life – The investment portion of your premiums are invested in indexes that follow the S&P 500 or a similar index
  • Variable Universal Life – Your investment portion of the premium is invested in a variety of investments including stocks, bonds, and mutual funds. The diversification is the greatest with this policy, but the risk is also the highest.

What Can You Do With the Cash Value?

You know you can’t touch your death benefit as long as you are alive. That is reserved for your loved ones upon your death. But what about the cash value – is it something you can use?

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You are able to tap into the cash as needed, but there are restrictions. If you ‘borrow’ the money, you must pay principal plus interest in order to leave the death benefit in place. You can also withdraw funds as you see fit; however, you reduce the death benefit by that amount unless you pay it back.

You are also able to withdraw the entire amount of the cash value. If you do this, though, you end the policy. Your loved ones will not have a death benefit should you die. Watch the fine print on your policy, too. Some policies have a period that you must wait to surrender the policy without paying a penalty. If you surrender the policy too soon, you could pay a surrender fee.

Should you invest in cash value life insurance or stick with term life insurance? The answer depends on your situation. In some cases, it can make sense. Let’s say, for example, that you have maxed out your retirement contributions and still have money to invest. You may consider investing in your life insurance policy. You should discuss your options with your tax advisor, though. There may be other tax-advantaged investments you can make that will allow you to have access to your funds easier than whole or universal life insurance.

If you decide permanent life insurance is right for you, shop around to get the best rate of return on your investment!

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